The Goods and Services Tax (GST) Council has implemented a significant restructuring of tax slabs, effective September 22, reducing the number of slabs from four to two. This move has sparked discussions in the FMCG sector, with industry experts expressing surprise at some of the decisions made.

New GST Structure

The new tax structure has consolidated the previous four slabs (5%, 12%, 18%, and 28%) into two primary slabs of 5% and 18%. This restructuring has led to tax reductions for several common FMCG products:

• Hair oil
• Soap
• Face powders
• Shampoos
• Toothbrushes
• Toothpaste

These items have been moved from the 18% slab to the lower 5% slab, potentially benefiting consumers through reduced prices or increased pack sizes.

Surprising Exclusions

Despite the tax cuts for many personal care items, some products have been notably excluded from the tax reduction:

• Detergents
• Cosmetics
• Hair dye
• Household insecticides
• Skin care products
• Paints

These items will continue to be taxed at 18%, a decision that has raised eyebrows in the industry.

Industry Reactions

The exclusion of certain products, particularly detergents, from the tax cuts has drawn attention from industry experts:

• Harpreet Singh from Deloitte India commented, "Detergents are basic necessities for hygiene, and their continued higher taxation appears anomalous, especially impacting lower and middle-income families."

• Abneesh Roy from Nuvama Institutional Equities expressed surprise at the exclusion of detergents, noting that "soaps and toothpaste received cuts despite being similar daily consumption items."

Impact on FMCG Companies and Consumers

FMCG companies are planning to pass on the GST benefits to consumers through various strategies:

• Increasing pack sizes
• Reducing prices on larger packs

These measures aim to ensure that consumers benefit from the tax reductions on applicable products.

Beauty and Personal Care Market Outlook

Despite the exclusion of cosmetics from the tax cuts, the Indian beauty and personal care market continues to show strong growth:

• The market is growing at an annual rate of 10-11%
• Experts note that while GST cuts could have accelerated cosmetics growth, demand remains robust
• Growth is driven by aspirational buying and expanding rural consumption

Conclusion

The GST restructuring has brought mixed reactions from the FMCG sector. While many common personal care items will see reduced taxation, the exclusion of detergents and cosmetics from these cuts has surprised industry experts. As companies prepare to pass on benefits to consumers, the impact of these changes on both businesses and households will be closely watched in the coming months.

The Fast-Moving Consumer Goods (FMCG) sector experienced a significant downturn as the Nifty FMCG index dropped 2.00% in response to recent GST Council tax reforms. The decline comes as investors move to book profits following the announcement of reduced tax rates on everyday essentials.

Market Reaction

The sell-off was widespread across the sector, with 14 out of 15 index constituents facing declines. Notable stocks affected include:

• Varun Beverages
• ITC
• Emami
• Colgate-Palmolive
• Dabur
• Marico
• Hindustan Unilever Limited (HUL)
• Britannia

These companies saw their stock prices fall between 1.00% and 4.00%, marking a significant reversal from the recent bullish trend.

Recent Performance

The current downturn follows a strong rally in the FMCG sector between August 13 and September 5, during which the index gained 2.10%. During this period:

• Colgate-Palmolive led the gains with a 12.20% increase
• Britannia followed closely with a 12.00% rise
• Beverage stocks, particularly Varun Beverages, bucked the trend with a 7.20% decline

GST Reforms

The GST Council has approved a simplified two-slab structure, which is at the heart of these market movements:

• New tax slabs: 5.00% and 18.00%
• Additional 40.00% slab for luxury goods
• Elimination of the 28.00% and 12.00% brackets

These new rates are set to take effect from September 22, potentially reshaping the pricing strategies of FMCG companies.

Expert Analysis

Nomura, a leading financial services group, has weighed in on the implications of these tax reforms. They noted that the reduction of GST from 18.00% to 5.00% on staples could have positive effects:

• Easing of household consumption pressure
• Potential boost in sales volumes for FMCG companies

Outlook

While the immediate market reaction has been negative, the long-term implications of these GST reforms remain to be seen. The simplified tax structure could potentially lead to increased consumer spending on everyday items, which may benefit FMCG companies in the long run. However, in the short term, investors appear to be taking a cautious approach, realizing gains from the recent rally.

As the new GST rates come into effect later this month, market watchers will be keen to observe how FMCG companies adjust their strategies and how consumer behavior evolves in response to potentially lower prices on essential goods.